Industry Perspectives Op-Ed: TruGrp v Karmina – Uncertainty in the use of letters of credit to vacate construction liens?

“Ensuring payment of contractors and subcontractors and encouraging liquidity in the flow of funds to them are both significant preoccupations in the construction industry.”

Construction liens act as a charge on land. This can impede cashflow on a project, and can create ancillary issues for an owner of a project. The Ontario Construction Act provides a mechanism for liens to be vacated by transferring the charge on the land to an alternative security, which is then posted with the Accountant of the Superior Court.

Ultimately, the Court adjourned the motion, and in doing so, created uncertainty with respect to the use of letters of credit as security under the act. This uncertainty will remain until the Court issues its final decision, which is expected later this year.Unlike lien bonds, for which a specific form is prescribed under the act, letters of credit do not have a prescribed form.

According to TruGrp, this created a potential gap in security, and as a result, TruGrp alleged the letter of credit was not adequate.Karmina, which posted the letter of credit to vacate the lien, raised numerous procedural arguments against TruGrp’s motion. All of the procedural arguments were rejected, leaving the substantive issue for the Court’s determination.

Conversely, Karmina submitted the Court has been approving letters of credit with similar provisions for decades without issue, and the role of the accountant as a custodian should not be interpretated to be a purely passive role as argued by TruGrp. The Court held if either the accountant or the bank intended to take a position, it would be given an opportunity to do so. If neither elected to take a position, the Court would issue its ruling based on the submissions already made.Given the adjournment of the motion, there is uncertainty as to whether letters of credit with similar renewal provisions will be acceptable security to vacate a lien.

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